Risk-averse Mitigation Decisions under an Unpredictable Climate System

Risk aversion plays a central role in decisions in the face of uncertainties, and climate change mitigation should be no exception. However, the interlinkage of risk aversion and climate change uncertainties has been hardly investigated numerically in part due to computational difficulties of stochastic optimization. In this paper, we apply numerical techniques of stochastic optimization to the economic modeling of climate change with the aim to model decision preferences of a risk-conscious agent in the face of unpredictable climate change. The model underlines the critical role played by the risk aversion parameter in determining the effects of uncertainties on mitigation, not only in level but also in sign.

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